Metals: Big Business in the Amazon

In Brazil, leading iron ore miner Vale is struggling to keep up with growing steel demand that's creating shortages in workers and equipment

by Joshua Schneyer

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From deep in the Amazon jungle comes the latest theory, or stereotype, about women drivers: Apparently, they go easier on tires.

Valid or not, the assumption is one reason given by managers of Companhia Vale do Rio Doce (RIO), or Vale, the world's biggest iron ore miner, for stepping up hiring of females to drive mammoth, 190-ton Caterpillar dump trucks. The trucks are used to move 1 million tons of earth a day at the company's iron ore mine in Carajás, Brazil.

Every centimeter of precious, rubber tire tread counts to keep up production of the world's most used metal at Carajás, and meet surging demand from steelmakers. Big mines have been "suffering" from a short supply of equipment like off-road tires, Vale said in a filing last year to the U.S. Securities & Exchange Commission. These days, a single 12-foot "super-giant" tire for mining dump trucks can cost as much as $90,000.

Perhaps nowhere is the urgency, and difficulty, of satisfying the world's appetite for commodity metals more palpable than around Carajás, a mining complex Vale operates in a swath of forest in the Amazon Basin of northern Brazil. Vale plans to invest nearly $2 billion in the area this year, and around $15 billion within the next five years. It's spending $11 billion to expand Carajás' iron ore output by 2012, and will also build or expand copper, nickel, and other mines nearby.

Few Signs of a Slowdown

Those massive projects reflect the runup in demand for steel worldwide this year and the race among the biggest mining outfits to up capacity, whether by expanding their own mines or buying others. But they also show just how risky these huge bets can be, even for a company that had sales last year of $39 billion. Vale's American depository shares ran up 40% from late January through Feb. 28, partly on its plan to buy Xstrata, a Swiss mining outfit. But turmoil in the financial sector may well have sunk that $90 billion deal, and Vale's shares have dropped 14% from their high through Mar. 17, partly reflecting concerns that the slowing U.S. economy could lead commodities demand lower. While past U.S. slowdowns have slammed commodities markets, Vale executives are convinced that demand for the company's main products, like iron ore, will continue to rise fast despite any U.S. recession, on strong demand in China, Brazil and other regions.

Here in Carajás, though, there are few signs of a slowdown. The challenge Vale faces if it is to continue cashing in on the global commodities boom is to overcome surging costs and scarce supply of heavy equipment, geologists, engineers, and operators. The Rio de Janeiro company has expanded in recent years to become a one-stop shop for the world's steelmakers. Vale envisions building 10 to 20 mines around Carajás someday, making it the world's richest source of iron and a major fount of copper, nickel, manganese, and gold. It hopes to boost its capacity in iron ore—the key ingredient in steelmaking—by 50% through 2012, to 450 million tons.

Tito Martins, a Vale executive director, says the company envisions Carajás as the most sustainable major industrial development ever in the Amazon region, with perhaps enough iron and other materials to continue feeding the world's big steel companies for three centuries or more.

Combating the Region's Deforestation

But to accomplish that, the company will have to buck a dismal track record for past investment in the Amazon region, where expansions into mining, rubber, and agriculture have often gone abruptly from boom to bust, destroying a fragile ecosystem in the process. Vale says it seeks to minimize the environmental impact by recycling the water used in mineral processing, and planting native seedlings to "reforest" the 750-foot hills of mine tailings. The company has committed to protecting primary rainforest of around 1.2 million hectares (2.96 million acres) that surrounds its mining properties, which cover only around 2% of the forested area.

Still, satellite imagery shows vast deforestation in this region since the 1970s, mostly from ranching, charcoal production, farming, and small-time "wildcat" mining. "What Vale is trying to do is a longer-term and more environmentally conscious project than we have seen here in the past," says Ana Cristina Barros, the Brazil representative for the Nature Conservancy. "But it's not clear whether Vale's activities will actually reduce wildcatting and other destructive practices in the Amazon." Some say the wildcatters only dropped off in recent years around Carajás because they ran out of fresh spots to pan for gold and moved elsewhere. Soaring gold prices are one reason wildcat mining is alive and well in other parts of the Amazon. Adds Barros: "Vale is protecting a significant slice of rainforest, but that's an isolated activity. Whether Vale is bringing a whole new economic model to the Amazon is certainly not clear yet to me."